Macroeconomics chapter 2
Which of the following events would affect the CPI but not the GDP deflator?
1. Kellogg's, the American cereal maker, cuts the price of a box of corn flakes.(CPI&GDP) 2. Boeing, the American airplane manufacturer, raises the price it charges the U.S. Air Force for fighter jets.(GDP deflator) 3. Barbers around the country raise the prices they charge for haircuts.(CPI&GDP) 4. Volvo, the Swedish auto maker, raises the prices of the cars it sells in the United States.(CPI)
When Senator Robert Kennedy ran for president in 1968, he gave a speech in which he said the following about GDP: "It does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans."
1.GDP is an imperfect measure of economic performance or well-being. 2.GDP ignores the imputed rent on durable goods such as cars, refrigerators, and lawnmowers; many services and products produced as part of household activity, such as cooking and cleaning; and the value of goods produced and sold in illegal activities, such as the drug trade. 3.GDP is useful in comparing economic activity from year to year. 4.a large GDP allows us to afford better medical care for our children, newer books for their education, and more toys for their play 5.countries with higher levels of GDP tend to have higher levels of life expectancy, better access to clean water and sanitation, and higher levels of education. 6.GDP is useful in comparing levels of growth and development across countries.
Place each of the following transactions in the proper category of expenditure used to calculate GDP.
Consumption is expenditures by households on final goods and services. Government purchases are purchases of final goods and services by the government. Investment is purchases of goods and services by business. Exports are products that are sold abroad.
If a person quits his job to become a stay-at-home parent. Please complete the statement below. The labor-force participation rate falls, and the unemployment rate rises
Labor-force Participation rate = Labor force/Adult Population A person who becomes a stay-at-home parent is withdrawn from the labor force. LF↓, LFP↓ Unemployment rate = Unemployed/Labor force unemployed unchanged, labor force↑, unemployment rate↑
Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2 each, green apples cost $1 each, and Abby buys 10 green apples. Assume that year 1 is the base year in which the consumer basket is fixed. a. Compute the CPI for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? b. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2? c. Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2? d. Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2? e. Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d).
The CPI for year 1 is: The CPI for year 2 is: CPI has
A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. When the engineer eats the bread, what is the value added by each person? What is the bread's contribution to GDP?
The farmer's added value is $1 The miller's added value is $3-1=2 The baker's added value is $6-3=3 The bread's contribution to GDP is $6
Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than an employee). Consider how this marriage impacts how output in the economy is calculated.
When the butler stops receiving a wage after the marriage, the value of GDP decreases. However, if GDP is meant to reflect the value of all domestically produced goods and services, then perhaps GDP should remain unchanged because the butler's services continue to be provided.
How do each of the following events affect the current level of U.S. GDP (Y) and its four components (C, I, G, and NX)? For this question, assume that General Motors does all its manufacturing in the United States and that all people and firms are American unless otherwise specified.
a. A car that the Garcia family buys from General Motors is a consumption good. Thus, Y will increase, since production occurred, and C will increase. All other components of GDP will not change. b. A car that the Baltimore police department buys from General Motors is a government purchase. Thus, Y will increase, since production occurred, and G will increase. All other components of GDP will not change. c. A car that Avis buys from General Motors is considered an investment good. Thus, Y will increase, since production occurred, and I will increase. All other components of GDP will not change. d. A car that a family in Mexico purchases from General Motors is a U.S. export. Thus, Y will increase, since production occurred, and NX will increase. All other components of GDP will not change.
Tina is the sole owner of Tina's Lawn Mowing, Incorporated (TLM). In one year, TLM collects $2600000 from customers to mow their lawns. TLM's equipment depreciates in value by $325000. TLM pays $1560000 to its workers, who pay $358800 in taxes on this income. TLM pays $130000 in corporate income taxes and pays Tina a dividend of $390000. Tina pays taxes of $156000 on this dividend income. TLM retains $195000 of earnings in the business to finance future expansion. How much does this economic activity contribute to each of the following?
a. GDP = value of all final goods and services produced within an economy in a given period of time GDP = $2600000 b. GNP = GDP + Factor payments from abroad - Factor payments to abroad NNP = GNP - Depreciation = ($2600000 + $0 - $0) - $325000 = 2275000 c. National income = Compensation of Employees + Corporate profits = $1560000 + $715000 = $2275000 Corporate profit = Corporate income taxes + Dividends + Retained earnings = $130000 + $390000 + $195000 = $715000 National income = NNP d. Compensation of employee = $1560000 e. Proprietor's income = $0 ( TLM is a corporation) f. Corporate profits = $715000 g. Personal income = National income - Corporate profits + Dividends = 2275000 - 715000 + 390000 = 1950000 h. Disposable personal income = Personal income - Personal income tax = 1950000 - (358800+156000) =1435200
In Year 1, an economy produces and consumes 2 apples and 2 oranges, each of which sell for $4. In Year 2, the economy produces and consumes 4 apples, which still sell for $4, and 1 orange, which sells for $12. Year 1 is the base year and the time when the basket for the CPI is set.
a. Nominal GDP in Year 1= ($4 x 2 apples) + ($4 x 2 oranges) = $16 Real GDP in Year 1 = ($4 x 2 apples) + ($4 x 2 oranges) = $16 b. Nominal GDP in Year 2 = ($4 x 4 apples) + ($12 x 1 orange) = $28 Real GDP in Year 2 = ($4 x 4 apples)+ ($4 x 1 orange) = $20 c. GDP deflator in year 1 = (Nominal GDP in Year 1)/(Real GDP in Year 1) = $16/$16 = 1. GDP deflator in Year 2 = (Nominal GDP in year 2)/(Real GDP in Year 2) = $28/$20 = 1.4. Inflation rate GDP deflator = 1.4/1 - 1 = 40%. d. Year 1 is ($4 x 2 apples) + ($4 x 2 oranges) = $16. Year 2 is ($4 x 2 apples) + ($12 x 2 oranges) = $32. CPIyear1 = 16/16 =1. CPIyear2 = 32/16 = 2 Inflation rate CPI = 2/1 - 1 = 100%. e. GDP deflator Paasche (changing basket) index tends to understate inflation, whereas CPI Laspeyres (fixed basket) index tends to overstate inflation.
How do each of the following events affect the current level of U.S. GDP (Y) and its four components (C, I, G, and NX)? For this question, assume that General Motors does all its manufacturing in the United States and that all people and firms are American unless otherwise specified.
a. combines positive spending (the purchase) and negative spending (inventory disinvestment), so it does not affect GDP. Thus, when General Motors sells a car to the Kim family out of its inventory, consumption increases but investment decreases. All other components of GDP will not change. b. When General Motors sells a car out of inventory, it is considered disinvestment (investment goes down). However, when Avis buys the car, it is considered investment by the same amount. They simply offset each other. Thus, allcomponents of GDP do not change, and GDP does not change. c. Volvo is a foreign car company. When it sells a car to an American family, the family has increased U.S. household consumption, and the purchase is also a U.S. import. Thus, consumption increases, net exports decreases, and the other components of GDP do not change. U.S. GDP also does not change. d. When the federal government gives the Jackson family a tax cut, which the Jacksons do not spend, no transaction occurs, and production does not take place. Thus, GDP and all its components do not change.
In an economic model:
a. exogenous variables and endogenous variables are both determined outside the model. b. endogenous variables and exogenous variables are both determined within the model. c. endogenous variables affect exogenous variables. d. exogenous variables affect endogenous variables. Endogenous variables are determined within the model.
Important characteristics of macroeconomic models include all of these EXCEPT:
a. simplifying assumptions. b. functional relationships based on randomized control trials. c. endogenous and exogenous variables. d. implicit or explicit consistency with microeconomic foundations.
Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think the well-being of the average person mentioned will increase, decrease, or not change? a. A hurricane in Florida forces Disney World to shut down for a month. b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests. c. Increased hostility between unions and management sparks a rash of strikes. d. Firms throughout the economy experience falling demand, causing them to lay off workers. e. Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution. f. Fathers around the country reduce their work weeks to spend more time with their children.
a. the income of workers and shareholders of Disney World will fall (the income side of the national accounts), and people's consumption of Disney World's services will fall (the expenditure side of the national accounts). b. Real GDP will rise because the original capital and labor used in farm production will now produce more wheat. This corresponds to an increase in the economic well-being of society, since people can now consume more wheat. c. Real GDP will fall, since, with fewer workers on the job, firms will produce less. This will lead to a decline in economic well-being. d. workers' incomes will fall (the income side), and there will be fewer goods for people to buy (the expenditure side). e. The economy now produces less measured output but more clean air. Although clean air is not traded in markets and so does not show up in measured GDP, it is a good that people value. f. Measured real GDP will fall because fathers will spend less time producing market goods and services. The actual production of goods and services, however, need not fall, since the unmeasured production of child-rearing services will rise. The well-being of the average person may very well rise